Friday, July 30, 2010

My apologies... this is a long piece (~2500 words). Not for the faint of heart. If you want the short story, read the abstract below & 3 core assertions, then cut to the conclusions at the bottom.

Abstract: VC funds are getting smaller (good), & angel investors are growing (also good), but both need to get smarter & innovate. Startup costs have come down dramatically in the last 5-10 years, and online distribution via Search, Social, Mobile platforms (aka Google, Facebook, Apple) have become mainstream consumer marketing channels. Meanwhile acquisitions are up, but deal sizes are down as mature companies buy startup companies ever earlier in their development cycle.

What does this mean? What opportunities/pitfalls does it present for investors?

Let's start with 2 intial observations about the current market for investors, and for startups.

Assertion #1: Most consumer internet investors (angels, seed funds, big VCs) have no clue what the fuck they're doing. Except for a few brand names, most large funds >$150-250M will die in the next 3-5 years... and that's a good thing. Still, smaller investors will need to innovate and differentiate in order to attract proprietary, quality dealflow and survive.

IMHO, whether or not your fund is large or small is not the primary issue in consumer internet investing. While my biased belief is $10M-100M seed funds are a lot easier to manage & more entrepreneur-aligned than "traditional" $250-500M+ funds, there will likely be a few winners and LOTS of losers at both ends of the spectrum. Probably more BIG fund losers than small fund losers, but still there are many other factors than fund size that will predict for success or failure.

No, the primary issue is that investors of all shapes and sizes have become incredibly lazy and complacent over the past two decades, measured by both activity and by IRR. Meanwhile, the consumer internet has brought a tsunami of technological & behavioral change which has resulted in stunning reductions in time & cost needed to distribute products and services to the over 2-3B connected people on the planet.

Fuck.That. Noise.

Most consumer internet investors, large or small, have no goddamn clue what they are doing. They are getting killed on IRR, and most of them should be put down & put out of their misery... NOW. Their investment thesis is suspect, their domain-specific skills are limited or non-existent, and their desire & ability to innovate is minimal. They are simply collecting fees, waiting for the next tee time.

Well ATTENTION K-MART SHOPPERS -- you, Mister VC 1.0, are about to be DECIMATED... and it's a Schumpeterian Fate that is both deserved and overdue.

HURRY UP & DIE ALREADY, U FRIGGIN' PATHETIC DINOSAURS.

indeed: most VCs are Dinosaurs, and the World Wide Web is an Asteroid that hit the planet in a slow-motion cataclysmic explosion 15 years ago. It may take another 5 years for the ash clouds & nuclear winter of Browsers, Search Engines, Social Networks, & Mobile Devices to kill all the T-Rexes, but it's a done deal. The marsupials are taking over and in 2015 there will be a lot more investors that look like Jeff Clavier, First Round Capital, Y-Combinator, TechStars, Betaworks, & Founder Collective than any Sand Hill VC (funny how all the innovation is from non-valley investors, isn't it?).

Now let's take a look at changes that have occurred, & how to adapt as a Lean Investor 2.0:

Assertion #2: There is tremendous opportunity in building revenue-focused consumer internet startups for $1-5M that a) attain some level of commercial viability, b) acquire customers predictably using online distribution channels (Search, Social, Mobile), and c) can later be sold for $25-$250M.

Historically, Venture Capital has been about the use of large, risky, CapX spending to accomplish two primary & typically expensive goals:

1) Build Product.

2) Acquire Customers.

Now in the past, PRODUCT has meant building a variety of expensive things (big iron, disk drives, personal computers, packaged software, computer chips, designer drugs, network routers, browsers, search engines, social networks, etc) with lots of people over periods of years. We're talking 50-100+ people spending 3-7 years building shit, with no offsetting revenue for quite some time. That's a lot of headcount and expense before you even get to your first customer.

And to make that even worse, many of the VC-funded startup companies target CUSTOMERS have been large, enterprise companies in tech and/or government entities with looooooong sales cycles requiring expensive, direct, dedicated sales force... that also cost shitloads of time & money. Or large mass-marketing sales & marketing campaigns conducted via expensive print, radio, & television marketing. And the sales cycle was annual, requiring ongoing efforts to hit quarterly or annual sales targets via license revenue and maintenance support and upgrades.

Finally, many of these companies were being built/financed to go public over a series of many years and multiple capital raises where the amount of ownership by the entrepreneur was quite small (usually single-digit %'s) and the target exits were huge, hundred-million if not billion-dollar outcomes.

Fast Forward to Twenty-Ten, and let's take a look at these fundamentals, with a specific lens on the consumer market & internet startups:

PRODUCT now typically means a website or service, run on low-/no-cost open source software, hosted in the cloud on low-cost servers, developed in a few months (or a WEEKEND!) by a small team of 1-5 developers, who continuously test & iterate in real-time with online customers

MARKETing now typically means using a variety of online distribution channels via paid & organic search (SEM/SEO) on Google, viral/social amplification on new media platforms & social networks like Facebook, Twitter, & YouTube, and the quickly-growing mobile platforms of Apple iPhone & Google Android. With the exception of search, most of these distribution channels didn't exist 5 years ago, yet they now easily reach over 100M-500M+ users, with very low cost and measurable marketing campaigns such that even a small team can reach billions of people globally.

So to summarize: PRODUCT development cycles are shorter, required materials & resources are free or low-cost, development teams are smaller, and new services mashup & build on top of old services that already deliver terrific value in the cloud via features, data, network effects, & APIs. MARKETing costs are lower, due to a variety of broadly-available, low-cost, online distribution channels, which can be used in more measurable and predictable ways than ever before. high-bandwidth to the home means video and other data-intensive media are commonly available to anyone with cable or satellite TV. REVENUE can be generated simply & continuously, via direct business models & online payment methods that are becoming mainstream all over the world... such as mobile payments even in the remotest, poorest economies.

Finally, as more tech & internet companies mature and become profitable, they in turn are a larger source of exits & liquidity as they attempt to acquire startups with innovative technology & desirable products & services. By utilizing their larger customer base as a way to leverage distribution, they can acquire smaller companies who want low-cost ways to access new customers. However, as more of these companies mature & compete for acquisitions, many startups are getting bought up earlier in their lifecycle at smaller dollar amounts than if they had to grow to IPO-required size. And as even non-technology companies attempt to acquire innovation & expertise in online services, more but smaller exits is a likely ongoing trend.

Okay, so that's a lot of crystal-ball gazing into the near-future, but now let's take a look at some emerging best practices & fundamentals for investing in Consumer Internet startups.

Largely, this is about applying techniques in Customer Development (Steve Blank) and The Lean Startup (Eric Ries) to investing, and in particular how to research, improve, & identify Product/Market Fit (Sean Ellis, Marc Andreesen), otherwise known as "TRACTION", before and after you invest.

This is really the key to my investment thesis: Invest BEFORE product/market fit, measure/test to see if the team is finding it, and if so, then exercise your pro-rata follow-on investment opportunity AFTER they have achieved product/market fit. It's sort of like counting cards at the blackjack table while betting low, then when you're more than halfway thru the deck and you see it's loaded with face cards & tens, then you start increasing your betting & doubling-down.

Let's face it -- most venture investors are sheep. We like unfair advantages. We want to know that there is already customers, revenue, and that elusive thing called TRACTION. Unfortunately, if it's obvious that there is already customers, revenue, and TRACTION then there will likely be a LOT of other investors at the trough, the competition will be fierce, and as a result the price to invest will be high.

So how can you invest at low-cost, then figure out when to follow-on to increase your value?

it's pretty simple, actually.

INVEST EARLY at LOW COST in people you think are smart and have built some promising products. understand if they know how to iterate and use customer feedback to improve their product and/or marketing. learn how to understand conversion metrics for their business & customer value.

then IF you see the metrics improving & customer / business value increasing... then DOUBLE-DOWN.

however this happens in 3 distinct stages:

1) PRODUCT: Discover a [large enough] customer segment with a meaningful problem / strong desire, and develop a functional solution for them to use (Minimum Viable Product aka MVP). I also call this when ACTIVATION happens. You should also make sure the user experience is compelling enough for them to use it more than once (RETENTION).

2) MARKET: Test for scalable distribution channels that allow you to acquire large # of customers at cost less than what you will generate (ideally, at <20-50% of annual revenue so you have some cushion). You may also find you have to go back to #1 and change some things, or discover entirely different marketing campaigns & concepts to get to scale. If you're lucky you may even discover a way to get your users to spread the word for you (word-of-mouth and/or viral features).

3) REVENUE: hopefully your MVP is already obviously valuable enough that people will pay something non-zero for it. regardless, the goal is to test & optimize for product/market(ing) combinations that generate cash-flow positive outcomes at scale, over short periods of time (or longer periods if you have financing structure to merit). i tend to prefer business models with low complexity, such as direct transactional or e-commerce models, subscription billing models, or lead-gen / affiliate models.

Ideally you'd like to be able to invest in a functional product AFTER the entrepreneur has already got it working, but sometimes they aren't there yet, and often they will have to pivot regardless in order to find an interesting segment that scales & is profitable. Still, i'd like to think most entrepreneurs who understand their customer can build a functional MVP in 3-6 months, for <$100K. Sometimes it takes longer / more capital, but most times it doesn't. If they look like they figure it out, double-down.

Next, you'd like to be able to improve the user experience and engagement / retention, get them to increase their love for the product. If you can do this well enough, your customers will become your marketing... at very low cost. Even if you can't get to strong word-of-mouth or viral marketing, you can still hopefully reduce customer acquisition cost by getting incremental social amplification. Regardless, your job is to discover SOME kind of scalable distribution channel that seems like it COULD be optimized to a point where it's cash-flow positive at some point in the future. Hopefully this doesn't take more than $1-2M and 6-12 months to figure out. But most of this spend should be on MARKETING channels & testing, NOT on adding more features... you can pivot to discover new customer use cases, but DO NOT keep adding features. in fact, you might want to remove them (see KILL A FEATURE). If it looks like you've got scalable distribution, even if not quite break-even, then double-down.

Finally, now that you have functional product (hopefully AWESOME product with strong activation / retention / referral metrics), and you have some ideas on scalable distribution that converts to non-zero revenue events (or proxy events such as long usage or referral / affiliate / lead-gen behavior, advertising CPM/CPC/CPA), now you need to tune to get to profitability within some finite period of time that you can finance and/or stretch to achieve. This is where it can sometimes get quite expensive, and it could take years to get to profitability for some businesses, but i'd like to think that my startups can figure this out in $1-5M and 1-2 years. Again, if it looks like you can get there, then double-down.

In summary, you should be thinking about stages for risk-reduction & company value creation that look like this:

1) Product: $0-100K, 3-6 months to develop basic MVP that's functional & useful for at least a few customers. Get to small product/market fit.

Comments

Always such a blast.

- Decided when to double down -- you may get slightly better info but most of the time you're going to have to dump some capital when you are still in the gray zone. We call it Prove / Build / Scale and the tough bit is building some people infrastructure before your thesis is proven outside of your launch market.

- not clear on whether you want to have capacity to follow on inside your own fund or whether you want to go for a Founder Collective positioning ?

Dave, I think you pinpointed the current situation well, and suggested a reasonable approach method to optimize the investment thereunder.

However, like both sides of the same coin, all things in this world have both positive and negative aspects. If the principles of economics and standardized rules are rigidly applied to startups, we can accomplish the higher success rate, but we are likely to sacrifice and lose better opportunities which might make us join "The Giving Pledge"

What a great read Dave. I think you are so right in your take on the industry, and I love the fact that you are so open in sharing....the way you write is the way companies are starting to operate, no BS, honest, value adding. This is why people follow you, and this is why tech start ups that are lean and valuable will succeed.

Hi Dave,
I'm a mobile serial entrepreneur now launching www.movyloshop.com (SaaS mobile commerce solution).
I have raised money in the past for other start ups and are not bootstrapping it on my own cause the VCs generated more problems than benefits int he past, so I complete agree with you.
But my point is: how do you manage the quickness required for product dev & mktg activites with...the slow fund raising? You can create a viable products in a short time, but it's unlikely that you put it live and get millions people on it. And raising money is a full time job that takes time...even raising small amounts.
That is why all innovations (google, FB, Youtube....) all come from the same locations where the "funnel" is working fine.
I agree that...smaller investments on metrics and smaller way outs are the future, but...at this stage is easier to create a SaaS viable solution than...having it exploding in the short term.
How would you close that gap?

loved the post. What would be super-duper is if you understood more what went into developing an Internet service. One WEEKEND to design/develop a service that scales up to 1M? Your points seem much stronger from the MBA view. The challenge I have is you are devaluing what it really takes product wise. THAT IS NOT TO SAY A LOT of money has been wasted on development. I agree with that. Your knowledge of product development (as noted above) loses the article's credibility.

Fun post. I am particularly keen on your Assertion #2. Along with the shift toward "microVC" / "superangel" / "seed accelerators" / "etc." will come a rise in the importance of "micro M&A" for startups...deals that are well under the normal threshold for big i-banks, but that can provide meaningful returns to founders and angels (but not always VCs).

I think we'll see this scenario play itself out more and more, particularly in the web world: once founders have raised some angel$ (from 500Hats fund, natch), achieved product/market fit, and hit some initial traction, they'll come to a fork in the road...either swing big and raise multiple rounds of VC, or focus on a dual BD/acquisition strategy with strategic partners.

I think in many cases founders can actually make MORE money by exiting early (while still controlling a hefty share of equity) vs. going for the big score (fueled by multiple VC rounds and concurrent dilution). Plus, exiting early at $50m after 2-3 years means founders can quickly repeat the cycle, vs. hanging on for the typical 6-8 years it takes most VC backed co's to achieve.

In a nutshell, "Small VC is the new black" and "early M&A is the new exit."

(Of course, this oversimplifies things and is a very rational way of looking at it....it overlooks the hubris that many founders get when things are growing fast and they start to get courted by name brand VCs...but I'm convinced we'll see more small exit deals, particularly if some of your thesis holds true); I put a related deck on the topic of startup exit strategy up on slideshare: http://bit.ly/dnmrLH

Hey Dave, very interesting article, I enjoyed reading it, thanks! It's cool how you make fun of old VCs, and it's probably true. I'm a web developer and the startup I'm in right now has gone the "dinosaur" way, but we're a service business, which makes things a little bit more complicated.

This fine and dandy when it comes to some product/service that runs online on a network and hardware already built and paid for by previous startups like Cisco/Intel etc.
I don't think you can develop a new materials technologies or semiconductors or bio tech ventures with this model that you put forth.
For those ventures still require a lot of heavy lifting and there are not many VC's of the ilk you mention like Y-combinator etc to fund such ideas/startups.
The kind of startups you mention take advantage of lot of the heavy lifting already done to create this platform.
I would like to see First Round Capital or USV or you invest in seed stage in Biotech startup or in a new energy technology venture.
The stakes are much higher and it is not for faint hearted, maybe Governments are the best suited to these investments, cuz private enterprise is least risk averse.

The same principles apply when investing your own capital.EVERY entrepreneur considering a start up or even those considering a new business line should read this. The big established VCs will probably blow this off because the implications for their business model are too horrible to contemplate.

A lot of what you say is true, and I'm unqualified to comment on the rest. But, as an entrepreneur (wannabe) it'd be nice to see it from this side of the fence. Since startup costs are low, what do I really need investors for ? Mentorship (which is very suspect, for now), connects (useful) - so I guess the "smaller" VCs will need to be more part of the team than someone sitting across a desk peering at numbers (dis)approvingly.

Dave, you do a great job of analyzing the implications of the idea that web 2.0 technology has democratized startups - the cost of getting off the ground is much lower and reaching customers is more accessible.

I agree with Rick Bullotta's comment, though, that a lot of the startups who meet the criteria you've outlined tend be copycat, fad-driven companies. I wonder why tech innovation is so focused on gaming, more targeted search advertising, etc. when these tools could be used to address problems in other domains. Healthcare, for example, is devoid of interesting companies that take advantage of social media and search to bring better information to consumers.

I'd like to see a response from the perspective of the so-called "dinosaur VCs" you mentioned...

Keep it simple asshole (your language), Example investment thesis - startup costs are down, hence smaller fund and I have guts to make quick decisions. If you had built worth while startup before, you would have known, what they mean by focus, focus. And also dont say exits are small, it will hurt your future portfolio, you never know.

Dave, the downside of the "web-enabled insto product" mindset is that a shitload of startups are copycats. Walking through the aisles at the TechCrunch thing in NYC a couple months ago, 95% of the companies started their pitch with "we're like XXXXX, but...". Like, "we're like Facebook, but for pets". Please. Spare me.

There is a middle ground for "real innovation" that will require a bit more capital than copycats and "applied technology" startups. If we don't find a way to fund real primary research and technology innovation and are just focused on following social fads with lightweight "insto startups", we're fucked as a country over the long term.

Brilliant post, Dave, written as only you could write it. You make a good case for the strategy behind my startup law practice -- "invest" in building client relationships with entrepreneurs at the pre-seed stage, before they've achieved product-market fit, doing their startup work for much lower rates than the big firms charge, with the goal of retaining and building on those trusted relationships when the successful ones reach the "double down" stage. Also, bring to bear a product-centric world view with deep specialization in one area (consumer/social Web in my case). Going after many clients at the earliest stages, who have the smallest amount of cash available to pay their lawyers, is probably the hardest way to build a practice (vs. the traditional pursuit of fat-cat corporations with huge legal budgets), but in the long run, I think it's the smartest way to thrive in the brave new world of disruptions in the VC ecosystem that you describe.

On a related note, I'd be curious to hear what you and other readers think of the Series Seed approach to streamlining documentation and reducing legal fees for seed rounds. I posted my (admittedly skeptical) thoughts at http://bll.la/55.

This is a good analysis. VC will take too long to pick it up unless, as he says, they're innovative. The reason is that they distrust cheap assets. They want their money to buy expensive, protectable assets. And yet expensive and protectable are two concepts that can be separated. It's far cheaper to get a new company up and running in ways that are differentiated from a brand standpoint, and lawyer up on protecting the brand, than to do patentable stuff.

I would want a version of this article that looks at the root cause of increasing total return to shareholders. This is essentially what gives VC their exit ... it creates an argument for the future value of the cash flows that VC can sell to people whose money will replace theirs (next tranche, IPO). So, the problem to solve REALLY is creating measurable, increasing total return to shareholders.

What are the drivers for that? 1. Compelling and engaging value prop - for social media plays, this means solving a problem, engaging the imagination, architecting a user experience that is easy to adopt AND YET NOT GENERIC (god, I hate those 'don't make me think' UI people who make everything so 'web 2.0' that it's all the same vanilla cr*p), lowering barriers to recommendation, allowing co-creation and sharing, and enhancing the customer's reputation. 2. Cognitive sophistication in customer experience management. 3. Well-designed multitouchpoint ecosystem, including partner ecosystems, that are measurable. 4. Hella analytics. 5. Lots of experiments, well-designed and targeted to increase customer engagement (see Gallup and Carlson).

Done.

The rest of the argument can fit with what I outlined. Remember, the goal is NOT to make it cheaper, or to engage customers sooner, or even to get revenues. Cheap can be bad. Engaging early adopters is not enough. And revenues can be expensive - that is, you have to have PROFITABLE revenues that are ALSO early indicators of FUTURE CUSTOMER VALUE.

Great job Dave. Rackspace is hosting an event on October 7th for B2B SaaS apps. I assume your event in SanFran on the 8th would preclude you from being able to be one of the judges in our start-up session FundMyApp, but I wanted to still ask if there are any very early stage (what you call "product") firms that you could encourage to come and pitch during this session. Ping me back at andy.schroepfer [at] rackspace [dot] com.

For those reading this that have or know of a B2B SaaS application firm (of any size) that would like to attend, please contact me at the email above. Thanks, Andy

Discovery-driven Planning and Agile Market Research - An Antidote to Doubling Down Prematurely?

Dave, good post. Should provoke a lot of discussion. I'd like to share some supporting perspectives and offer alternative solutions.

Two academics - Ian MacMillan (Wharton) and Rita McGrath (Columbia) - have examined many of the issues you raise in their discussions of innovation, uncertainty and investment. MacMillan puts it succinctly when he recommends "spending imagination before you spend your money and... engineering the risk out of uncertain projects..." In a nutshell, the process he and McGrath advocate involves 1) creating tests to probe and reduce the uncertainty ahead of investment; 2) staging the investment tranches, contingent on intermediate outcomes; 3) postponing investment until (some of the) uncertainties are resolved.

Useful sources on their perspectives include notes from a conference last month at Wharton http://bit.ly/aIihsF; a video in which MacMillan and McGrath explain the rationale and benefits of the approach, which they call "Discovery Driven Growth," at http://bit.ly/dxJdwi; their book http://amzn.to/cZeLIW; and McGrath's blog at http://bit.ly/cL1AG8. Several readers have pointed out the parallels between their perspectives (developed over the last 10 years or so) and the "lean startup" notions of Eric Ries (http://bit.ly/hSVtd) - these complementary perspectives are crucial to avoid the pitfalls you've identified.

Another important and useful resource is what we call Agile Market Research. Entrepreneurs often make bold assertions re: market potential, e.g., how the market will respond to their product, conversion rates, projected ASPs, etc. These hypotheses and others can be tested in advance of significant investment and commitments. While "listening to customers" and "build it and (see if) they will come" can be informative, more accurate methods can be used to predict market response and are recommended when opportunity costs, investment and/or uncertainty are high. Data can be obtained and a predictive model generated relatively quickly and at lower cost, compared to a market test - the model is also more robust (e.g., allows for the testing of many different configurations, price points and business models, not just one or a few). While predicting consumers's response to "very new" products (e.g., iPad; Twitter; etc.) is fraught with challenges, it's not impossible (for further discussion, see http://bit.ly/9kJ1tZ).

Hi Dave--long time since FSV and early SVASE. What if it takes more than $100K to get to product, but less than $1M to get to revenue/profitability in 6-12 months? Is that still worth a seed investment?

Great post... in concert, with the sea change occurring with this startup funding paradigm, there is a shifting mentality among entrepreneurs... the best entrepreneurs are hopefully looking for the intangibles that the angels bring to the table, more so than the actual cash. That is something worth giving up equity for. As a first time entrepreneur, i really do subscribe to that thought.

We are currently bootstrapping our product development in a pre-revenue environment, after raising friends and family money 3 years ago - with those coffers now depleted. While figuring out ways to keep our operations moving forward, and always *thinking* we're so close to hitting profitablity, I'm not at all interested in diluting our equity for cash... but I'd do it in a heartbeat to get access to someone who's done it before - that's the angel that I want... I would get the best of everything without entertaining VC-level equity dilutions.

Well written Dave; not experienced enough to speak for the metrics you attached to each stage, but the breakdowns into stages (Product/Market/Revenue) and what to focus on in each, are useful particularly for first-timers like myself. Bon courage.

More coffee, man! I mean that in a good way. Seriously, though, well-constructed in terms of your staging out thesis.

I think that where in practice things get potentially more complex is that in doing Seed or being a micro fund, you have to have a clear plan (and powder) on deals where you find yourself in the realm of liking the deal but being in the gray area between Seed and Series A readiness (in eyes of VCs).

You have to be clear if you are REALLY prepared to be the Lead Investor if you believe in the venture.

For VC's, I wholeheartedly agree with the Dixon analog of treating this as a Call option on Series A since they specifically want to be the lead in Series A.

By contrast, many Seed Round investors aren't prepared or capable to Lead, and that lack of preparation puts them in a position where they either drain their coffers or miss out on the double-down scenario when subsequent phases play out.

Refreshing and insightful Dave. Having sat on both sides of the line (VC & Entrepreneur) I fear the once revered VCs have all but become irrelevant. Have done the dance many times with these guys and music hasn't changed a beat - while the web world has evolved exponentially.

This is a brilliant writeup! I like the points you've hit on, and how you specify how to change them for the better. As a startup in the consumer Internet space currently raising seed capital, I can attest to the Product > Market > Revenue strategy.

Although we are raising a total of $300k, the bulk of our cost will be in the Product development stage. I've been given estimates of ~$118k to have just the e-commerce engine developed. Luckily for us, once this is done, we will pretty much be cash flow positive within our first month of operation.

The one thing I am noticing across the board with the VCs we've spoken to is the prevailing sheep mentality you alluded to. It's an unfortunate fact indeed, and one that most certainly contributes to the increasing demise of the traditional VC investor, and the rise in the angel investors, and those VC who participate in early round funding. Thanks for the write up, Dave. And I wish you much success on your 500 Startups venture fund.

Fantastic post. Feels like many tech investors are looking for bond-like risk, with early stage return and it just doesn't work that way. You nailed it -- got to invest before the traction if you want to get the right pricing.

I really share your view and would like to add a small note. What I see as a typical T-Rex behavior is a local investing, e.g. most investors invest only in the Bay area.

I like your GOAP idea where you and likes explore opportunities outside the U.S. Of course it's going to be riskier business to invest "somewhere" in Europe or Asia.

But if you, or better say any investors, go the extra mile then you can invest at really low cost compared to the U.S. values. So it might be really win-win situation for both investors and foreign startups.

I like the point about investors knowing the space. As an entrepreneur its been hard for me to find good investors who know and understand the space I'm in (SMB) to be comfortable enough to put in small amounts of capital. I've had to bootstrap my venture for the last 7 months. In doing so I actually came to the realization that if I start to make revenue that will cover my operational costs then I don't need to take investment or can hold off and give my employees better equity based compensation. I'm wondering if there are other entrepreneurs out there who are starting to think like me and hold off on taking investment.

Dave, your diplomatic skills are as finely tuned as ever. One question: How do you structure sub $100K deals? Common? And do you do the full shareholder and purchase agreement bit? What are transaction costs on that type of deal?